TOP LENDER SEES MORTGAGE WOES FOR 'GOOD' RISKS

By VIKAS BAJAJ; Julie Creswell contributed reporting.

Published: July 25, 2007

Countrywide Financial, the nation's largest mortgage lender, said yesterday that more borrowers with good credit were falling behind on their loans and that the housing market might not begin recovering until 2009 because of a decline in house prices that goes beyond anything experienced in decades.

The news from Countrywide, widely seen as a bellwether for the mortgage market, initiated a sell-off in the stock market, which is at its most volatile in more than a year. The Standard & Poor's 500-stock index fell 30.53 points, or 2 percent, to 1,511.04, its biggest one-day drop in nearly five months. The dollar dropped to a new low against the euro, edging closer to $1.40 to 1 euro. Stocks opened sharply lower in Japan this morning.

The slumping housing market has become the biggest worry for the stock market, which just four days ago set records, because of its potential impact on the broader economy and financial system.

Countrywide's stark assessment signaled a critical change in the substance and tenor of how housing executives are publicly describing the market. Just a couple of months ago, some executives were predicting a relatively quick recovery and saying that most home loans would be fine with the exception of those made to borrowers with weak credit who stretched too far financially.

Executives at Countrywide had for some time been more skeptical than others but the bluntness of their comments yesterday surprised many on Wall Street. In a conference call with analysts that lasted three hours, Countrywide's chairman and chief executive, Angelo R. Mozilo, said home prices were falling ''almost like never before, with the exception of the Great Depression.''

Nationally, home prices have not fallen in the 35 years or so that the government and private services have tracked them. Some researchers like Robert J. Shiller of Yale have compiled data that goes as far back as 1890 and shows that home prices fell for several years during the 1930s.

Mr. Mozilo said that because of a large number of homes on the market, the housing sector would continue to suffer until sometime in 2008 and not begin recovering until 2009.

Shares of Countrywide fell 10.5 percent, or $3.56 yesterday, to $30.50. The stock steadily declined during the conference call, falling as far as $29.50 before recovering.

Countrywide's earnings were the latest in a series of shocks that have rattled the markets in the last two months. Recently, Bear Stearns said two of its hedge funds were virtually worthless after brash bets on investments backed by risky mortgages with billions in borrowed money.

Last month, the usually optimistic Robert I. Toll, the chairman and chief executive of the luxury home builder Toll Brothers, acknowledged that housing might not rebound before April 2008. In early February, Mr. Toll had told Wall Street analysts the industry was ''at the beginning of the comeback trail.''

Bond ratings agencies have begun to downgrade and re-evaluate mortgage securities, which has virtually shut down the market for certain debt offerings that specialize in home loans. That, in turn, has made it harder for some private equity firms to finance buyouts.

Countrywide, Wells Fargo and other lenders have also stopped offering a popular subprime loan that carried a fixed rate for 2 years and an adjustable rate for 28 years.

Investors are demanding more in return for holding junk bonds and yesterday pushed the yields on the securities to 8.4 percent, the highest they have been in nearly two years, according to KDP Investment Advisors, a research firm.

What was added to the worries yesterday was the idea that even credit-worthy homeowners would default on mortgages at higher rates as home prices fall -- and that even a well-run company like Countrywide could be hit by big losses.

At the end of April, home prices were down 2.1 percent from a year ago, according to an index that tracks 20 large metropolitan areas compiled by the research firm Case-Shiller. That compares with an 11.2 percent increase from April 2005 to April 2006.

Countrywide said about 5.4 percent of the home equity loans to customers with good credit that it held an interest in were past due at the end of June, up from 2.2 percent at the end of June 2006. By comparison, more than a fifth of subprime loans were past due at the end of June, up from 13.4 percent a year ago.

''Where you will see prime borrowers have trouble is where they took the riskiest of adjustable-rate mortgages and put nothing down with a first and second combined,'' Thomas Lawler, a housing economist, said.

Many of Countrywide's home equity loans were second mortgages made to people who were financing the full or nearly full cost of their homes. These loans are particularly risky because when house prices are falling and a home is foreclosed and resold, the holder of the first lien is paid off and often there is little left to apply to the second mortgage.

''Countrywide is highlighting what is an industrywide problem,'' said Christopher C. Brendler, an analyst with Stifel Nicolaus, an investment firm in St. Louis. A second mortgage ''is really an unsecured loan like a credit card.''

Countrywide said its customers who are falling behind on payments appear to have lost jobs, had a divorce or fallen ill. Many are living in homes that are no longer worth what they were when the loan was made and cannot refinance because lenders have become stricter.

The company reported second-quarter earnings fell 33 percent, to $485 million, largely because it had to write down the value of loans and other assets by $923 million.

Another problem is how Countrywide pays Mr. Mozilo, 68, and one of the company's two founders. Though he is considered a pioneer in the mortgage business, he has become a target for shareholder activists as more attention has focused on executive pay in general and on the lucrative rewards reaped by mortgage executives in particular during the housing boom.

On the conference call yesterday, one investor asked Mr. Mozilo how he could justify selling stock while Countrywide was buying shares, which have fallen.

In the last five years, Mr. Mozilo has exercised options and sold shares for a profit of nearly $380 million, according to data compiled by Thomson Financial. Starting last fall, Mr. Mozilo significantly increased the number of shares he was selling on a regular basis for profits of more than $130 million.

''The decision to buy back stock is a collective decision that emanates from the financial operation of the company and is based on what is in the best interests for the shareholders,'' he said, noting that he has all the shares he received when he started the company nearly 40 years ago. ''It's totally unrelated to the issue of my sale of stocks.''